China-based Xiaomi has announced that the company plans to ship 40 million smartphones in 2014. But Digitimes Research believes the vendor is unlikely to achieve the goal as many of its competitors have started establishing online shopping operations to sell their own-brand products with impressive hardware specifications at low prices - a business model similar to Xiaomi's.

Xiaomi is a brand vendor that has been promoting its smartphones by highlighting their high-end features yet entry-level pricing, and the company is mainly selling smartphones through its online store. The company is known for its hunger marketing, limiting supply at product launch to create an impression of strong demand for the device.

In August 2013, the China-based vendor released its CNY799 Hongmi smartphone, extending its product protfolio to lower-tier market segments. The competitive pricing resulted in impressive sales.

Xiaomi's marketing strategy managed to shoot up its shipments beyond the 18 million mark in 2013 and earn the brand a lot of attention.

By selling products through their online shops, smartphone vendors can avoid sharing their profits with retailers and telecom carriers, and therefore can offer lower prices for their devices.

As a result, many China-based smartphone players are adopting the Xiaomi model and have established sub-brand products and online operations to enhance their competition. These include major players such as: Huawei's Honor; Gionee's Iuni; and CoolPad's Great God. These players are either offering competitive pricing or trying to create new brand images, in hopes to expand their share in China's competitive smartphone market.

Huawei is a major player with abundant R&D and marketing resources, as well as strong support from its supply chain. Huawei released its Honor 3C smartphone in December 2013 priced at CNY798. Its pricing and features were similar to those of Hongmi. In response to Huawei's challenge, Xiaomi reduced its Hongmi price by CNY100 in January 2014. The price reduction is expected to significantly impact Xiaomi's profitability, and the challenges from Huawei, and other players, are likely to hinder Xiaomi's plan of having entry-level products drive up overall shipment volumes.

With more China-based smartphone vendors expected to create sub-brand products and run online stores in 2014, Xiaomi will face fiercer competition from its peers in 2014. Although China's online shopping continues to see surging sales, it only accounts for less than 20% of the country's total retail sales and Xiaomi's share of online smartphone sales is expected to be heavily dented by the competitors in 2014.

Xiaomi is still weak in terms of sales in the conventional market and through telecom channels, and it will lose its pricing advantages if it has to share its profits with retailers. Digitimes Research believes the China-based vendor will not be able to gain much profit through conventional channels.

With China's smartphone market gradually approaching saturation, shipments to overseas markets will become a key driver for growth in 2014. However, Xiaomi has only just started to explore the overseas markets, which are unlikely to make much contribution to the company in the near future.

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